Microsoft's New Strategy Skims the Surface

Given that Microsoft's new price cut on its beleaguered Surface RT tablet came right after its announced reorganization -- and coincides with rumors of a Surface watch -- it's hard not to speculate about what might be in the works. "Microsoft's reorganization is about their future," said BU professor N. Venkat Venkatraman. "I see Surface RT as part of the old regime."

By Erika Morphy
Jul 16, 2013 12:11 PM PT

Microsoft has slashed the price of its Surface RT by some 30 percent, or US$150, putting the price of the tablet now at approximately $350, depending on the version.

The price cut follows hard on the heels of news that the company will undergo a reorganization, in part to bolster its still-flagging efforts in mobile and tablet computing.

Particularly intriguingly, the news also coincides with rumors about a Surface watch -- begging the question, why would Microsoft choose to associate its upcoming wearable tech with the faltering tablet brand?

Whether or not the three developments are related, it's clear there is much happening behind the scenes in Redmond.

Microsoft did not respond to our request to comment for this story.

Intellectual Capital, Robust Pipeline

The price cut comes only 10 months after the Surface RT was introduced. Microsoft held out great hopes for the device; it was to give the company a much needed boost in the mobile device space.

Instead, demand was lackluster and sales of the device were disappointing.

Still, there is considerable intellectual capital and a robust product pipeline at Microsoft -- not to mention formidable financial resources.

"With Julie Larson Green leading the device and studio strategy across Surface, Xbox and any incubation projects, such as the rumored smart watch, there is an opportunity to take a holistic look at the Microsoft portfolio," Val Wright, principal of
Val Wright Consulting, told the E-Commerce Times. "Already there is talk of marketing the upcoming Xbox One to business customers; maybe the rumored smart watch will be an Xbox Watch?"

'Everyone Will Be Watching'

Microsoft's corporate restructuring could also lead to better times ahead for the company, said N. Venkat Venkatraman, a business professor with
Boston University.

"Microsoft's reorganization is about their future," Venkatraman told the E-Commerce Times. "I see Surface RT as part of the old regime -- it was an attempt to make Windows 8 exciting."

Viewed through that prism, the price cut was inevitable because Microsoft needs to clear the supply chain, he added.

"Clearly, Ballmer is focusing on devices and services and downplaying software," Venkatraman said. "So, devices will be important, but not the previous generation devices such as Surface that never really gained any traction. This price cut and clearing out the inventory gives the new management a clean slate to start."

Not that the reorganization will be a magical fix-it; it could well backfire. Microsoft's decision to become "nimble, decisive, communicative and collaborative" -- as Steve Ballmer put it in his email to employees last week -- is a gargantuan turnaround, Wright pointed out.

"Collaboration is exceedingly difficult at Microsoft, with an intense individual competitive culture," Wright explained. "Microsoft's future success will hinge on the relationships between the executives at the top, as they will set the tone for the whole organization.

"Everyone will be watching, internally and externally," she added.

'More Like Apple'

Perhaps the most interesting takeway from this series of events is that it is becoming clear Microsoft is trying to become more like Apple in terms of hardware-software integration, including the new reorganization, Venkatraman said.

"Will Ballmer be able to keep the 100,000 people aligned towards the devices and services vision? That is a tall order -- and that will be Ballmer's legacy if he pulls it off," he added.

Then again, the price cut could simply be Microsoft trying to fit the Surface RT's pricing to demand.

"I don't think these moves have anything to do with the reorganization, which is structured at the CEO level and generally not pushed to the product groups until execution, or the rumored watch, which would come from a different group," Rob Enderle, principal of the Enderle Group, told the E-Commerce Times.

Phased Penetration Pricing

"Microsoft is executing a phased penetration pricing strategy, where you gradually reduce the price of a product until it finds the price the market will accept it at volume," he said. "Sony executed a similar strategy with the PlayStation 3 and Apple with the first iPhone -- both products started out far more expensive and were reduced slowly to find their respective markets."

The strategy is commonly used because it is easy to bring prices down, but hard to move them up, Enderle noted.